Thursday, October 30, 2008

Market Turmoil Brings Dim Days for Luxury Hotels

Even as midprice hotels began losing business this past summer, luxury hotels continued to fill their rooms. Companies treated the hotels as perks for top executives and quality locations for high-level business meetings. And many leisure travelers considered a stay at a top hotel - even for a couple of days - to be worth the cost.

Times have changed.

Since mid-September, almost in parallel with the stock market turmoil, demand for high-end hotel rooms has plummeted. Patrick Ford, president of Lodging Econometrics, said that U.S. luxury hotel-room revenue rates "slowed in mid-September and really ratcheted downward during October."

Revenue per available room, the standard measure of performance, dropped 14 percent at upscale and luxury hotels in the week ending Oct. 18 over the comparable week last year, according to Smith Travel Research. For hotels in general, the decline was about 8 percent.

The trends were similar throughout the world. TRI Hospitality Consulting said September occupancy rates fell in all of the 10 European cities that it surveys. The damage at the top end was significant. In London, for example, average occupancy rates in five-star hotels fell more than 10 percentage points from a year earlier as a result of the financial turmoil, TRI said, with revenue per available room falling 17 percent.

Upscale to luxury hotels in the Asia-Pacific region reported a 9.6 percent decline in September occupancy rates from a year earlier, according to STR Global, while revenue per available room fell by 5.3 percent.

Even in the best of economic times, most luxury hotels were not sustained by business from rich leisure travelers. Instead, those hotels depended on corporate travel, including meetings and conferences.

But with the economic downturn, companies have been cutting back on travel expenses. The hotels have also experienced a drop-off in business from affluent international leisure and business travelers, as economies around the globe slow and the value of the dollar rises.

At the same time, travelers have become more defensive about conspicuous consumption.

Public indignation over big paydays and the lavish expenses of top executives has also hurt the luxury hotel business. Companies are now concerned about perceptions - worried about how it looks to others when employees stay in hotels whose very names evoke images of opulence. In part because of those concerns, there has been a sudden rash of cancellations of corporate meetings.

In this unsettled climate, some financial services and other companies have quietly advised employees against using luxury hotels.

"Don't stay in Four Seasons, Ritz-Carltons, Mandarin Orientals," said Bjorn Hanson, an associate professor at the Tisch Center for Hospitality, Tourism and Sports Management at New York University.

"It's a budgetary issue," he said, "but a more fundamental issue is, how does it look if you're laying off 10 percent of your work force and you have people staying at $500-a-night or $1,000-a-night hotels?"

In interviews and in public remarks, several luxury hotel managers conceded that business was temporarily shaky and cancellation rates soaring. But they were loath to discuss the downturn on the record.

Largely because of what Hanson called the "widespread creation of wealth," the number of U.S. domestic hotel rooms in the luxury segment almost doubled, to more than 80,000, in the past 10 years, according to Smith Travel Research.

At the same time, luxury hotel companies were also planting flags in every major city in the world.

Managers at luxury hotels point out that their corporate clients typically are lured less by lavish surroundings than by the impeccable customer service that distinguishes a top-tier hotel. Ritz-Carlton, for example, often cites its "empowered" work force, in which even desk clerks are authorized to unilaterally make decisions involving as much as $2,000 to address a customer problem.

The decline in demand has put pressure on the relationship between the companies that manage the luxury hotels and the developers and hotel real estate investment companies that own the properties and, therefore, bear most of the debt and operating costs. The brands include Ritz-Carlton, Four Seasons, Le Meridien, Mandarin Oriental, Fairmont and others.

It is axiomatic among top-tier hotels - as it is among top-tier department stores and jewelry sellers - that price discounting is detrimental to brand prestige. Holding sales in uncertain times means less ability to raise prices back to normal levels when good times return, hotel managers insist.

But many owners, feeling the pinch from credit and mortgage debt, want more revenue now and are pushing for aggressive discounting. In past downturns, the luxury hotel companies - whose books are generally free of huge debt (since they did not build the property or buy the real estate) - have managed to resist owners' pleas for overt discounting.

What does all of this mean for the traveler - or at least the business or leisure traveler who is still able to stay at a top-tier hotel? Better bargaining power, hotel insiders say.

"In the past, when we would approach a five-star hotel, they wouldn't be interested in discounting because that's going against their brand," said Noah Tratt, vice president for supplier strategy at Egencia, the corporate travel management company of Expedia.

That intransigence is weakening in many markets where "they are very willing to negotiate in the corporate channels on a private price that essentially doesn't undermine their published rates," he said.